Tuesday, April 24, 2012

Small Business and Entrepreneurship - To Startup or Not to Startup Part XI - Testing and Conclusion

"The concept is interesting and well-formed, but in order to earn better than a 'C,' the idea must be feasible."
--- Yale professor on Fred Smith's paper proposing overnight delivery service. (Smith went on to found FedEx)

"A cookie store is a bad idea. Besides, the market research reports say America likes crispy cookies, not soft and chewy cookies like you make."
--- Response to Debbi Fields' idea of starting Mrs. Fields' Cookies.

"We don't like their sound, and guitar music is on the way out."
--- Decca Recording Co. rejecting the Beatles, 1962.*

In this final article on the decision of whether or not to start a business, we will discuss testing customers and then conclude the series.

We've spent the last few articles researching our potential company's environment beginning with broad industries and narrowing things down into markets and market segments. Going through the exercise of researching all these areas should give a good idea of what is going on in our chosen market segment and give us an idea of how we want to approach our target customers. The next step is figuring out if our strategy will work.

We want to remember too that one of our goals in conducting this research is that we want to aim to try to get to our first customer, and our first sale, as quickly as possible. In the testing phase we are attempting to really get to know our customer and perhaps in doing so we can even secure an order or even an up-front payment? Either would surely make the decision to start a business an easier one to make.

Based on the information we've already compiled in our research we want to spell out who we think the target customer is, what benefit our product provides for that customer, how the customer decides whether or not to purchase our product, and the means by which we can reach our customer with our product.

Once we have all this information we can begin testing. The purpose of testing is to validate our business concept, verify what we think we know, and try to figure out what we don't know in order to then make adjustments.

Our methods for testing are surveys and interviews but may vary wildly in action depending on the nature of the target customer. If our product is something we are targeting at a very broad consumer market like for example, a new beverage, we can possibly test with surveys and taste tests at popular shopping locations. However, if our product was something like a business consulting service, it may require researching who at a target business makes the "buy decision" and figuring out how to contact some of these specific people for interviews.

We want to design our surveys or construct our interviews to find out first hand from our potential customers whether or not they would buy our product, why they would buy it, what is it that causes them to decide whether or not they would buy it, and how we they could be reached with our product.

Knowledge gained through testing can then be utilized to make adjustments prior to launching, or if the necessary adjustments are significant, perhaps a re-haul of our entire plan, and a later re-testing of the concept.

Once we've tested we want to go back and review all aspects of our research - our  financial projections, our industry and market research, and our testing results - and consider all of these prior to deciding whether or not to move ahead and start the business.

Every idea or product will be unique, some may have more attractive financial potential while others may have more attractive market opportunities, and even after all this work it will likely still be a very difficult decision. But the more we know about what we may expect if we launch, the better prepared we may be, and hopefully the higher our chance of finding a quick success.

* Full credit to "Things People Said - Bad Predictions" for the quotes at the top of this article. 

Thursday, April 19, 2012

Small Business and Entrepreneurship - To Startup or Not to Startup Part X - Market Segmentation

"The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself" -- Peter Drucker

"A market is never saturated with a good product, but it is very quickly saturated with a bad one" -- Henry Ford

The last article in this series focused on the difference between industries and markets, and the benefits of focusing on market segments.  For this post we will look at how to segment markets, what bases we should use for our comparisons, and how to select attractive markets.

As we stated in the previous post, studying market segmentation is an important practice for all companies but is especially so for a start-up. With limited resources market segmentation can focus a potential start-up on its most likely avenue of success, and least likely avenue of wasting those limited resources. What we want to do is identify different customer groupings in our market, explore what it is that drives each segment,  pick the most attractive segment and begin testing our product/idea on that group.

Let's begin with how to segment our market. In their book Consumer Behavior, Leon Shiffman and Leslie Kanuk identify four major categories of bases for segmentation[i]. These are Empirical Personal Features, Usage and Purchase Behaviors, Personality Lifestyles and Sociocultural Values, and Attitudes and Preferences Regarding the Product. When trying to decide how to best segment your market try looking at your market from these angles and see if one of them lends itself to your customer groupings:

Empirical Personal Features -- Demographics, age, location, gender, marital status, etc.

Usage and Purchase Behavior -- How and how often the product is used, purchased, etc.

Personality, Lifestyles and Sociocultural Values -- General attitudes and beliefs not related to the product for example, early vs late technology adapters, vegetarians, outdoor enthusiasts, i.e., this can be nearly anything.

Attitudes and Preferences Regarding the Product -- This is attitudes and beliefs specific to the product like benefits desired, attentiveness to and involvement with the product, etc.

Hopefully these give ideas for possible segments for your market. Perhaps you can use a strictly regional mark up of North America, Europe, Asia, etc, maybe it's how the product is used such as for commercial, residential or industrial applications, or maybe you can segment based on benefits desired such as functionality, size, or low cost. 

Once we have our bases for segmentation we need to define each segment. The important things we want to know are:

  • Identity - How do you define this segment, what is your separating characteristic?
  • Size - How large is this segment?
  • Growth - Is the segment growing, shrinking or stable?
  • Benefits - What are the key benefits that customers in this segment seek?
  • Competition - What is the nature of competing offerings in this segment and what are the competing products strengths or weaknesses?
  • Examples - Can we identify specific examples of potential customers in this segment?

After compiling all this information it may be helpful to organize it into a chart for easy comparison. If no segment appears to be clearly more attractive, perhaps the market can be segmented in another way in which will better describe the market from the perspective of our product.

Once we have completed our segmentation we can identify which segment appears to be the strongest or best fit for our product based on our preliminary research. We should understand that all this information is likely to change as we learn more about our customers, and that we may even shift our  focus a few times before deciding to launch our product. 

What this exercise does is give us a direction towards which we can begin testing potential customers. The next article in this series will deal with how to test target customers.

[i] Shiffman, Leon G., Kanuk, Leslie Lazar Consumer Behavior, 10th edition Prentice Hall Publishing, 2010, pg 58

Tuesday, April 17, 2012

Enable Subsidiary Solrayo Inc Awarded $499,498 Grant From The National Science Foundation

Those of you following Enable IPC over the past few years may be aware that Enable IPC subsidiary Solrayo Inc recently successfully completed Phase I of a National Science Foundation (NSF) Small Business Technology Transfer (STTR) grant and that the company had applied for Phase II funding. Today Enable announced that Solrayo, Inc has been awarded the Phase II grant of $499,998. 

The award builds on the successful NSF-STTR Phase I project, titled “Using Nanoparticle Oxide Coatings to Extend Cycle Life of Cathode Materials in Lithium-Ion Batteries”.  During the Phase I research, this inexpensive and easy-to-apply coating was shown to help increase the cycle life of certain rechargeable lithium ion batteries by several times.  This Phase II grant is designed to allow the full commercialization of the product.  The research and technology is being developed in collaboration with the University of Wisconsin in Madison

The work is being conducted jointly at SolRayo’s facility in Madison at the lab of Professor Marc Anderson at the University of Wisconsin.  The project officially commenced on April 1, 2012 and is scheduled to conclude on March 31, 2014.  

To read the full press release please follow this link: http://www.enableipc.com/press/2012/PR20120417.htm

Tuesday, April 10, 2012

Small Business and Entrepreneurship - To Startup or Not to Startup Part IX - Markets

"In marketing I've seen only one strategy that can't miss - and that is to market to your best customers first, your best prospects second and the rest of the world last." -- John Romero

"Marketing is too important to be left to the marketing department." -- David Packard 

We continue our discussion on the decision of whether or not to start a business with a look into product markets and market segmentation. In this article we will examine the difference between industries and markets and the benefits of focusing on market segments. The next article in this series will look at how to segment markets and identify which to target.

Last post we started at the broadest industry our product could fit in and then narrowed industries down until we thought we might begin cutting out potential customers. This led us to the beginning of market segmentation, so we'll start here with a discussion of the differences between industries and markets, as the definitions can get a little hazy and distinctions can blur.

According the Robert M. Grant in Contemporary Strategy Analysis industries are groups of firms that provide products for markets - and industries compete in both product markets and input (supply) markets. Industries are therefore broad while markets refer to more specific products and a company in a specific industry can compete in multiple product markets.[1]

As an example, we could say a company in the automobile industry can compete in multiple markets like the individual consumer market, the rental car fleet market, and maybe golf carts.

 Why are we discussing this? Decades ago there was one primary marketing technique -- mass marketing. Basically, a company would attempt to tout their product at some general level or appealing to a very basic need in order to appeal to as many people as possible. As an example maybe advertising a cereal as satisfying hunger, a very basic need and therefore “food for everyone”, as opposed to a cereal positioned as quickly dissolvable, healthy, and full of all the vitamins needed for an infant just starting on solid foods (therefore satisfying the same need but for a very specific group). The mass marketing approach is still possible today in some industries like commodities where there is little product differentiation.
However, with competition and product differentiation companies can and do focus products on specific groups within the broader market. Today when you look at major companies, they will often have separate products targeted at specific groups or combinations of groups.

Since we've just passed Easter let's take a look at a company like Cadbury. If you look at their product line at their website (here)  you will see dozens of different types of products. They have the cream-filled chocolate eggs always available this time of year, chocolate bars with very colorful, fun wrappers (perhaps to draw the eye of children), chocolate bars with more simple wrapper designs emphasizing the chocolate (perhaps to draw the eye of adults), and even cakes, hot chocolate and coffee creams. This complicated line of products is almost all chocolate based meaning they could theoretically all be targeting the same broad market, but there likely exist many charts in the Cadbury company's marketing department detailing their definition of the different Cadbury customer groups and how each product is positioned relative to the different segments.

Large companies can afford to develop large product lines and target specific groups of customers, they can position products to overlap each other, target multiple segments, they can have broad-targeted products and very specifically targeted products. They can saturate segments for the sole purpose of preventing competitors from targeting that group. However, for someone trying to decide whether or not to launch a product and start a business, it is probably best to focus on what appears to be the best bet at the time.

There is definitely an appeal to targeting the larger number of customers that may be available in the broader market. However, it is often the case that some form of differentiation of a product could yield more success focusing on a smaller segment, then an undifferentiated product unfocused on the broader market.

Let's consider a product that has two potential market segments (A & B) which prefer different features. We can choose one or the other, or both. We can focus our product on segment A by providing A's features, or we can focus our product on B by providing segment B's preferred features. To target the general (A+B) market though, we would need to either provide both A&B's features (which would likely be more costly) or we would need a basic product which provides neither groups features (which would be less appealing).

Failure to focus on one, could lose both as a competitor will come in with an A-targeted product and another with a B-targeted product and they will either have the features your product does not (if you created the featureless version) or their products will be cheaper (if you have created the A+B version).

However, the more immediate concern is that this is a start-up company. A start-up will want successes and self-sustainability as quickly as it can get them. It may also have limited resources preventing it from targeting both markets. Studying the segments, identifying which is the most attractive and then launching one differentiated product focused on either A or B, (whichever is more attractive) will likely yield the greatest chance of success. Ideally, after achieving a bit of success with A, the company can look at offering a product for B as well, but getting to the first customer, and the first dollar, quicker, is often a key to success for a start-up.

Next in this series we will look at how to differentiate between market segments and how to identify which is the most attractive.

[1] Grant, Robert M. Competitive Strategy Analyis Blackwell Publishing 2008 pg 85

Tuesday, April 3, 2012

Small Business and Entrepreneurship - To Startup or Not to Startup Part VIII - Industry Analysis

"There exist limitless opportunities in every industry. Where there is an open mind, there will always be a frontier" - Charles F. Kettering

"The early bird gets the worm but the second mouse gets the cheese" - Willie Nelson

We continue our series on the decision of whether or not to start a business by analyzing industries and markets.

Industries are typically defined according to their product (automobiles, soda, solar panels, etc), and industry participants can include all those companies along the value chain leading to product creation. Since an industry may be defined by its product there are therefore nearly an infinite number of industries. It can therefore be difficult to decide in which industry you are competing.

Let us say we want to start a company making solar power inverters (a device that converts the direct current (DC) received from solar panels into the alternating current (AC) used in our homes). Are we in the inverter industry? The photovoltaic (PV) industry? The solar power industry (Photovoltaics, Solar Thermal (ST), Concentrating Solar Power (CSP))? It can be tough to figure out where to draw the line, but for this section we want to take a pretty broad approach, and narrow things down more when we get into markets and customers (markets are typically defined along customer groupings).

Running with this example, what we can do then is start with a brief look at power generation (gas, coal, nuclear, solar, wind, etc), then look at solar power generation (PV, ST, CSP) when it looks like we will begin excluding potential customers by narrowing further that may be a good time to stop.

For example, inverters would not be used with ST and probably not with CSP, so we concentrate on PV, but if we try to narrow the PV industry down further we may start excluding inverter users.

Now that we’ve got an idea of what our industry is we can move on to what we want to know. We will eventually want to become experts in our industry, to start we can begin with:

  • What has happened in our industry in the past?
  • What is happening now?
  • What changes are coming, what will happen in the future?
  • Is the industry growing?

Answering these 4 questions can give us a good grasp and insight into our industry and help us understand changes that are occurring. Change means opportunity and the ability to find a niche for a new company or product in a changing landscape is many an entrepreneur’s key to success.

When trying to understand the dynamic of the industry as it is now, one analysis tool that is helpful (and taught in every business school) is Porter’s 5 Forces. Our list will include more than 5 items but is heavily based on the original Porter’s forces. Analyzing our industry along these lines can greatly contribute to our understanding of the way the industry works.

Substitutes – A substitute product is a competitor that does not directly compete in your industry but which customers may still choose as an alternative. This is best explained with a simple example: in the soda industry where Coke and Pepsi may compete with one another, tap water is a substitute.

Barriers to Entry / Exit – Are there heavy capital requirements to get in our out of this industry? If so it may be a big deterrent. When thinking of high barriers to entry or exit one common example may be the airline industry, where if you decided you wanted to start an airline you may need quite a bit of money to get in, conversely if you felt you were done running your airline company and wanted out, having to sell off your assets in order to exit may be a little difficult.

Suppliers – How common or rare are the supplies you need to create your product, and therefore, how much power over you will your suppliers have, how vulnerable are you to shifts in supply? In 2009 the PV industry saw a major drop in prices (revenues for some companies) due to an overproduction of silicon, an important component of photovoltaic cells. This overproduction was a response to prior years of short supply in which the high cost of silicon made solar installations much more expensive. How vulnerable is our industry to shifts in supply?

Buyers – On the other side, what is the power of the buyers in this industry? If your industry has few buyers then they would seemingly have more power, however if the buyers have limited options available to them, limited competing products or substitutes that would lower the buyer’s relative power.

Complements – Complementary products are those that increase value when combined or used together with other products. If our product has a complementary product, where does the power in that relationship lie? Think of the solar panel example. To the end user, let’s say a homeowner, the solar panel and inverter may be complementary products, in fact, if the homeowner wishes to use a solar panel he needs an inverter to convert the power to useable alternating current. From the perspective of the inverter company, the solar panel is a strong complement, but an extremely powerful complementary product as few customers are likely to buy inverters without also buying the solar panel.  

Rivalry - In this area we are considering what are the established competing companies, how concentrated is the industry, are these companies locked in fierce price-wars (which would make things a little unattractive to a new entry)? Perhaps there is room, if there are large companies locked in fierce competition perhaps a small new entry focusing on one product niche may be tolerated as the larger companies focus on each other?

Considering all these angles, where the industry has been, whether it is growing, the nature of competition in the industry, and where the industry may be headed will hopefully lead to a good idea of the way the industry operates and possibly point out potential problems or potential opportunities for our new venture. In our next section we will narrow things down a little bit and look at analyzing markets.